Risks of Owner Occupancy

If the owner occupancy rate at The Gayle drops below 51%, all owners will see the value of their property substantially reduced if they attempt to sell. The most likely result is that sales to normal homebuyers would be impossible, forcing all owners to become landlords, or to sell to investors for amounts substantially below market.

Why? The Federal Government insures our mortgages, reducing the risk to mortgage lenders and enabling the low-rate, long-term loans that we have come to take for granted. The government only insures mortgages it considers to be at a low-risk of a foreclosure where the bank would face a loss after reselling the property (and the government would have to pay out).

One of these risk factors is owner occupancy rates in multi-family properties. The federal government will not insure new mortgages on units in a building where owner occupancy has dropped below 51%.

Why? The logic is that if a building has most of its units leased out, there is a greater risk that the property has been poorly maintained because of owner apathy or even failure to pay maintenance dues. Also, it tells a story about the building itself. Why don’t owners want to live in this building? Is there something wrong with the neighborhood? The building itself? In the eyes of a lender, a building with a low owner occupancy rate is a higher risk investment for which they may not be willing to issue credit without substiantially higher interest rates and fees.

In short, if a building drops below 51% owner-occupancy, your property will be worth less money, assuming you are able to sell it at all. The reason? While loans are still available, they will be hard to find and much more expensive. Any buyer willing to find and pay for such a mortgage will have substantial leverage to pressure you to reduce your asking price.

Can we change the rules?

Investor owners will argue a) that no one can tell them how they can use their property, and b) that because they purchased their unit when rentals were allowed, any change to the rules would not apply to them.

Both of these statements are false, and legal precedent extends back for decades. One frequently cited 1975 Florida decision states:

"Central to the concept of condominium ownership is the principle that each owner, in exchange for the benefits of association with other owners, 'must give up a certain degree of freedom of choice which he {or she} might otherwise enjoy in separate, privately owned property."

More important, courts find that because owners knew at time of purchase that the Declarations and bylaws could be changed at any time, they must presume that any right or privilege held at time of purchase could be lost or restricted in the future. Specifically in the case of leasing restrictions, a Washington State Supreme Court case, Sadri, Gazrul v. Shorewood West Condominium Association held that new rental restrictions are binding on existing owners, stating:

"the property rights that owners of individual condominium units have in their units are creations of the condominium statute and are subject to the statute, the declaration, the bylaws of the condominium association, and lawful amendments of the declaration and bylaws. An association may apply a restriction on leasing, if adopted in accordance with the statute, to current owners."


The mortgage market that we operate in today is the product of the Great Depression.
Before the 1930s, more than 80% of Americans did not own their homes, and those who did had three- to five-year, interest-only mortgages with interest rates far higher than we would expect today. These were high-risk loans.

The Great Depression kicked off huge foreclosures—both with homeowners and landlords. The Roosevelt administration’s solution to massive foreclosure rates was identical to how it dealt with bank runs. Bank runs were stopped by the government guaranteeing peoples’ deposits via the FDIC: Even if the bank no longer had sufficient funds, the US government (and thus US taxpayers) would pay you out.

The mortgage solution—while a little more complicated—was the same: Put the government in the business of guaranteeing the money in the mortgage market. The first step was to stem foreclosures by providing money to banks that would enable loan modifications, refinancing mortgages for terms up to 15 years. But the most important piece was that if someone defaulted on their mortgage, the US Government, would insure the mortgages, substantially reducing risk for lenders.

While the secondary mortgage markets, collateralized debt obligations and credit default swaps that have devastated our economy recently would appear later, the entire reason we have 30-year mortgages at such low interest rates is that US taxpayers stand liable to pay out if the whole enterprise fails.

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